Telecom Wins Much Wider Loophole From IRS
|August 11, 2014||Posted by Staff under Taxes|
This 2014 excerpt of the New York Times, Aug 9, is by Gretchen Morgenson.
Internal Revenue Service officials ruled that Windstream Holdings, a telecommunications company based in Little Rock, Ark, may spin off its copper and fiber network into a real estate investment trust (REIT). The REIT will lease the network to Windstream for $650 million a year. REITs are essentially tax-exempt entities, and because the $650 million will go to the REIT, it will not be taxable income to either company. Windstream will not pay taxes as a result of the company split.
Investors cheered the Windstream news; the company’s shares rose 12 percent on the day of the announcement.
Although the ruling is specific to Windstream, tax experts say it will exponentially broaden the pool of companies able to tap into the preferential tax treatment that was previously limited to real-estate-oriented trusts.
REITs are publicly traded entities that typically own commercial buildings, shopping malls, hotels or other properties. Mortgage REITs own bundles of loans. Both types allow small investors to participate in big-ticket real estate ownership.
A REIT trust must hold at least 75 percent of its assets in real estate and generate at least 75 percent of its income from property rents or interest on real estate financings or sales. Rather than retaining the income they earn and paying taxes on it, REITs pass along 90 percent of their income to shareholders (who then pay taxes). This means these companies have little in the way of taxable income.
Traditionally, REIT tax treatment could be applied only to assets with permanent structures. The new rules say real estate assets may include microwave transmission, cell, and broadcast towers as well as parking facilities, bridges and tunnels, railroad tracks, transmission lines, pipelines and storage facilities.
Electric utilities, cable operators and other telecoms would most likely join the REIT ranks as a result of the I.R.S. stance. Almost any company whose business involved real estate would be able to reduce its tax obligation by shifting taxable income derived from those assets to a nontaxable REIT entity.
Windstream will not have to pay taxes on $650 million in revenue. At the standard 35 percent corporate tax rate, the savings are nearly a quarter a billion per year. However, it could be less since telecom companies paid tax rates of 9.8 percent, on average, from 2008 through 2012.
Utilities paid just 2.9 percent over the period. These companies can pay so little because of tax breaks they receive.
Ed. Notes: Industries that don’t need any favors are those that get them, especially the real estate industry. Government policy is 180 degrees opposite what it should be. Our so-called stewards should auction off utility franchises (which are monopolies) to the highest bidder and renew the terms annually. Same goes for resource leases, broadcast licenses, patents and copyrights. Run government like a business — get as much as we can from corporate charters, banking charters, and other privileges. Even land titles should be granted for an annual rent at full market value.
At the same time, abolish taxes and subsidies and use the bulk of raised public revenue to pay citizens a dividend.
Simplify. Complexity is the enemy of equity. Without policy interfering, we can lock the hood on the economy and enjoy prosperity in liberty.